The Economy
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Transcript of The Economy
The EconomyWhat you didn’t want to know
Where it is
Where it isn’t
Where it might go
Where it might not go
Why?
Why not?are you blue enough?
Some people who majored in economics:
Gerald Ford
Ronald Regan
George Bush, Sr.
Sandra Day O’Connor
Arnold Schwarzenegger
Mick Jagger
Tiger Woods
What is Economics?Economics:
is NOT always what you think
is NOT Rocket Science
will NOT tell you how to get rich
Economics is the only field in which two people can receive a Nobel Prize for saying exactly the opposite thing.
What is Economics?Economics:
The First Law of Economics: For every economist, there exists an equal and opposite economist.
The Second Law of Economics: They're both wrong.
Economics is the painful elaboration of the obvious.
Economics is common sense made difficult.
What IS economics?
What is Economics?Economics is:about people and the choices they make.
(Gwarthey & Stroup, Economics: Private and Public Choice, 4th Ed., 1987, p. 4.)
the study of almost everything humans must do as they attempt to live their lives. (Carson & Thomas, The American Economy - Contemporary Problems and Analysis, 1993, p. 4)
the study of the use of limited productive resources in a society to satisfy the unlimited desires of its members. (Hyman, Microeconomics, 3rd Ed., p. 9)
the study of individuals’ behavior and the resulting effects on the allocation of scarce resources. (Barron & Lynch, Economics, 3rd Ed., 1993, p. 4)
focuses on all the choices people make as well as the personal and social consequences of their choices. (Byrns & Stone, Economics 5th Ed., 1992, p. 4.)
Economics is:the study of how scarce resources are allocated among
competing uses. (Ragan & Thomas, Principles of Economics, 1993, p. 6)
the study of individuals’ behavior in a world of scarcity. (Barron & Lynch, Economics, 3rd Ed., 1993, p. 4)
an inquiry into the nature and causes of the wealth of nations. (Adam Smith,1776)
the academic discipline most discussed by the general public. It is also one of the least understood. (Ramsey, Economic Forecasting - Models or Markets, 1977, p. 11)
the science of wealth. (Murad, Economics - Principles and Problems, 1963, p. 3.)
Economics is:the study of the economy
(Collander, Economics, 1993, p. 6)
what economists do. (Quoted by Becker, Economic Theory, p. 1.)
the idea of economizing. (Albrecht, Economics 3rd Ed. p. 7.)
the study of constrained maximization. (Bowden, Principles of Economics, 4th Ed. 1983, p.1.)
the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study of how people make choices. (Miller, economics today - the micro view, 2006, p. 3)
Things are not always what they seem
• Everything has a price
• There is a cost to everything
• Actions have consequences
• Frédéric Bastiat (1801-1850)
• That Which is Seen, and That Which is Not Seen
Basic EconomicsScarcity is:
Limited Resources & Unlimited Wants
Our wants exceed our ability to satisfy
Resources of production are insufficient to satisfy all of our wants
Must make choices
Basic EconomicsOpportunity Cost =
The value of your next best alternative, not taken.
Whatever you give up to do something.
Whenever you choose, you lose!
Where would you be if you weren’t here right now?
Basic EconomicsBasic assumptions:
People are rational.
Never intentionally do anything that would make themselves worse off.
People act in their own self interest.
The economy is the way that society chooses to answer the three questions:
What (to produce)
How (to produce it)
Who (who gets it)
What is the economy?
What is inflation?Blue Pill Answer:
A sustained rise in the average level of prices
Price index: CPI; PPI; PCE
Red Pill Answer:
An artificial increase in the money supplyInflation is always and everywhere a
monetary phenomenon (Milton Friedman)
1) Destroys the purchasing power of money
2) Redistributes income & wealth
3) Hurts lenders
4) Helps borrowers
5) Hurts workers
6) Helps business owners
7) Hurts those on fixed incomesOnly government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless. (Milton Friedman)
Effects of inflation
Nominal versus Real values:
Nominal = named, or market value
Real = purchasing power
Real = (Nominal / price index) x 100
Effects of inflation
Nominal wage = $10 per hour
Price level (CPI) = 100
Real wage = $10 per hour
Hamburgers are $1
Each hour of work = 10 hamburgers
Effects of inflation
Inflation!Inflation!Price level (CPI)= 120
Hamburgers = $1.20
Nominal wage = $10 per hourReal wage = $8.33 per hour ($10/120)x 100
Each hour of work = 8 hamburgersIt now takes $12 to buy what used to cost $10
Effects of inflation
I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments. (Friedrich August von Hayek)
Inflation is repudiation. (Calvin Coolidge)
Inflation is always and everywhere a monetary phenomenon (Milton Friedman)
Inflation
What is Unemployment?Blue Pill Answer:
Fraction of the labor force not employedPopulation- under 16- institutionalized- don’t want to work= Labor force
Labor force = employed + unemployed
Unemployment rate = (U / LF) x 100
What is Unemployment?Types of unemployment
Seasonal
Frictional = 3%
Structural = 2%
Cyclical = 0%
Full employment = 5% unemployment
Natural Rate of Unemployment
What is Unemployment?
Problems with measurement:
Underemployed?
Discouraged Workers?
Home production?
Underground economy?
What is GDP?Gross Domestic Product is
The total market value
of all
final
goods and services
produced
within national borders
in one year
2009 U.S GDP = $14,730,200,000,000 RELEASED AT 8:30 A.M. EDT, FRIDAY, OCTOBER 29, 2010 (BEA.gov)
What is GDP?Consumption $10,376,700,000,000Spending by households on goods & servicesMost stable70.5%
Investment $ 1,896,100,000,000Spending by business on capital goodsBusiness inventory adjustmentMost volatile13%
Government $ 3,018,900,000,000Spending on goods and services20.5%
Exports $ 1,842,100,000,000Spending by ROW on U.S. goods & services12.5%
ImportsSpending on ROW by U.S. $ 2,403,500,000,00016.5%
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&FirstYear=2009&LastYear=2010&Freq=Qtr
What is GDP?
1998 2001 2004 2007 2010 2011
8,793.5 10,286.2 (17%) 11,867.8 (15.4%) 14,061.8 (18.4%) 14,730.2 (4.8%) 15,087.7 (2.4%)
C 5,918.5 67.31% 7,148.8 69.50% 8,285.1 69.81% 9,806.3 69.74% 10,376.7 70.45% 10,722.6 71.07%
I 1,510.8 17.18% 1,661.9 16.16% 1,968.6 16.59% 2,295.2 16.32% 1,896.1 12.87% 1,913.6 12.68%
G 1,526.1 17.35% 1,846.4 17.95% 2,232.8 18.81% 2,674.2 19.02% 3,018.9 20.49% 3,029.7 20.08%
X 953.9 10.85% 1,027.7 9.99% 1,180.2 9.94% 1,661.7 11.82% 1,842.1 12.51% 2,087.6 13.84%
M 1,115.7 12.69% 1,398.7 13.60% 1,798.9 15.16% 2,375.7 16.89% 2,403.5 16.32% 2,665.8 17.67%
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1998&LastYear=2010&3Place=N&Update=Update&JavaBox=no#Mid
What is GDP?Country GDP (PPP)European Union $14,890,000,000,000United States $14,720,000,000,000China $ 9,872,000,000,000Japan $ 4,338,000,000,000India $ 4,046,000,000,000Germany $ 2,951,000,000,000Russia $ 2,229,000,000,000Brazil $ 2,194,000,000,000United Kingdom $ 2,189,000,000,000France $ 2,160,000,000,000Italy $ 1,782,000,000,000Mexico $ 1,560,000,000,000South Korea $ 1,467,000,000,000Spain $ 1,375,000,000,000Canada $ 1,335,000,000,000Indonesia $ 1,033,000,000,000Turkey $ 958,300,000,000
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html
What is GDP?Country GDP (PPP)Lebanon (87) $58,650,000,000Bill Gates $53,000,000,000Costa Rica $51,300,000,000Bolivia $47,980,000,000Uruguay $47,800,000,000Warren Buffett $47,000,000,000El Salvador $43,980,000,000Panama $43,480,000,000Luxembourg $40,810,000,000North Korea $40,000,000,000Cambodia $29,400,000,000Afghanistan $28,900,000,000Christie Walton $22,000,000,000Madagascar $20,730,000,000104 more countries
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html
What is GDP?
Problems:
No household production
No “underground” production
No black market production
Only indicates production not living standard
Six basic economic models(tools of analysis)
Cost = Benefit
Production Possibilities Frontier
Circular Flow
Supply and Demand
Business Cycle
Aggregate Supply and Aggregate Demand
Cost = Benefit model
Marginal!
If MB > MC?
If MB < MC?
Economic Decision Rule
Self Interest
Never intentionally do something that will make you worse off.
Production Possibilities Curve (Frontier)
1) The PPC models scarcity.
2) The PPC models trade-offs.
3) The PPC models Opportunity Cost.
4) The PPC models the Law of Increasing Opportunity Cost.
5) The PPC models efficiency.
6) The PPC models full employment:
Basic EconomicsLimited Resources:LandLaborCapitalEntrepreneurship ?Technology ??Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. As such, economics is the study of how people make choices. (Miller, economics today - the micro view, 2006, p. 3)
Production Possibilities Curve (Frontier)
Given: LandLaborCapitalEntrepreneurshipTechnology
• Unattainable
•Attainable but inefficient
X
Y
X1
Y1
Production Possibilities Curve (Frontier)
1) The PPC models scarcity.
2) The PPC models trade-offs.
3) The PPC models Opportunity Cost.
4) The PPC models the Law of Increasing Opportunity Cost.
5) The PPC models efficiency.
6) The PPC models full employment:
Say’s LawJean Baptiste Say (1767–1832)
“It is worth while to remark, that a product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products.” (J. B. Say; 1803: p.138-9)
"products are paid for with products" (J.B. Say; 1803: p.153)
"supply creates its own demand.” (J.S. Mill)
The act of production creates income sufficient to purchase what was produced.
or: Income equals expenditure equals the value of productionor: Y = AE = GDP
Say’s Law & the
Circular Flow Model
HouseholdsBusinessFirms Land
LaborCapitalEntrepreneurship
Resource Market
Goods & Services Market
Say’s LawJean Baptiste Say (1767–1832)
"products are paid for with products" (J.B. Say; 1803: p.153)
"supply creates its own demand.” (J.S. Mill)
The act of production creates income sufficient to purchase what was produced.
or: Income equals expenditure equals the value of productionor: Y = AE = GDP
“The Law of Markets”
Supply and DemandRequires markets
Demand: What you are willing and able to buy.
Supply: What producers are willing and able to bring to the market.
Teach a parrot to say, “Supply and demand”, and you have an economist.
Supply and Demand (Demand)
Health Care
(Doctor Visits)
Price (per visit)
Quantity (No. of visits)
$500 0
Supply and Demand (Demand)
Health Care
(Doctor Visits)
Price (per visit)
Quantity (No. of visits)
$500 0
$400 1
Supply and Demand (Demand)
Health Care
(Doctor Visits)
Price (per visit)
Quantity (No. of visits)
$500 0
$400 1
$300 2
$200 4
$100 5
$50 10
Supply and Demand (Demand)Health Care
(Doctor Visits)
Price(per visit)
Quantity(No. of visits)
$500 0
$400 1
$300 2
$200 3
$100 5
$50 10
Demand for Health Care
$0
$100
$200
$300
$400
$500
0 1 2 3 5 10
No. of Doctor Visits
Price
D=MB
Supply and Demand (Supply)
Health Care
(Patients Seen)
Price (per visit)
Quantity (No. of visits)
$0 0
Supply and Demand (Supply)
Health Care
(Patients Seen)
Price (per visit)
Quantity (No. of visits)
$0 0
$50 1
Supply and Demand (Supply)
Health Care
(Patients Seen)
Price (per visit)
Quantity (No. of visits)
$0 0
$50 1
$100 2
$200 3
$300 4
$400 5
$0
$100
$200
$300
$400
$500
0 1 2 3 4 5
Pric
e
No. of Paitents Seen
Supply of Health Care
Supply and Demand (Supply)Health Care
(Patients Seen)
Price (per
visit)
Quantity (No. of visits)
$0 0
$50 1
$100 2
$200 3
$300 4
$400 5
S = MC
Supply and DemandHealth Care
$0
$100
$200
$300
$400
$500
0 1 2 4 8 16
No. of Paitent - Doctor Visits
Pri
ce
S = MC
D=MB
BUSINESS CYCLE REFERENCE DATES DURATION IN MONTHS
Peak Trough Contraction Expansion Cycle
Quarterly datesare in parentheses
Peak to
Trough
Previous trough to
this peak
Trough from Previous Trough
Peak from Previous
Peak
May 1907(II)January 1910(I)January 1913(I)August 1918(III)January 1920(I)May 1923(II)October 1926(III)August 1929(III)May 1937(II)February 1945(I)November 1948(IV)July 1953(II)August 1957(III)April 1960(II)December 1969(IV)November 1973(IV)January 1980(I)July 1981(III)July 1990(III)March 2001(I)December 2007 (IV)
Average, all cycles:
1919-1945 (6 cycles)
1945-2009 (11 cycle)
June 1908 (II)January 1912 (IV)December 1914 (IV)March 1919 (I)July 1921 (III)July 1924 (III)November 1927 (IV)March 1933 (I)June 1938 (II)October 1945 (IV)October 1949 (IV)May 1954 (II)April 1958 (II)February 1961 (I)November 1970 (IV)March 1975 (I)July 1980 (III)November 1982 (IV)March 1991(I)November 2001 (IV)June 2009 (II)
1324237
18141343138
11108
1011166
1688
18
18
11
3319124410222721508037453924
10636581292
12073
35
59
4643355128364064638848554734
117526428
10012891
53
73
5632366717404134939345564932
116477418
10812881
53
66
What is the Business Cycle?Measured as change in rate of growth
7/90-3/91 (8 mo.)
3/91-3/01 (120 mo.)
3/01-11/01 (8 mo.)
11/01-12/07 (73 mo.)
12/07-6/09 (18 mo.)
What is the Business Cycle?Measured as change in rate of growth
http://www.tradingeconomics.com/Billing/Analytics.aspx?Source=ForecastButtonInChart
What is the Business Cycle?Measured as change in rate of growthReal gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.1 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "third" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent.
The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, and nonresidential fixed investment . . .
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, the same increase as in the second estimate; this index increased 0.7 percent in the third quarter.
Real final sales of domestic product -- GDP less change in private inventories -- increased 6.7 percent in the fourth quarter, compared with an increase of 0.9 percent in the third.Published: 3/25/2011TradingEconomics.com, US Bureau of Economic Analysis
http://www.tradingeconomics.com/united-states/gdp-growth
What is the Business Cycle?Measured as change in rate of growth
http://www.youtube.com/watch?v=LyePCRkq620&feature=player_embedded#!
http://www.youtube.com/watch?v=RWsx1X8PV_A
http://www.tradingeconomics.com/united-states/gdp-growth